OECD Economic Surveys: Norway 2019

Executive Summary

Wellbeing is high, but must be sustained

Norway continues to enjoy among the highest living standards in the OECD area but faces challenges in sustaining them for the future.

OECD wellbeing indicators put Norway alongside the top-ranking countries. Reported well-being, jobs and earnings, work-life balance and the distribution of income are very favourable compared with most countries.

However, sustaining the high levels of economic output and comprehensive public services that are key to Norway’s wellbeing is a challenge. There is no longer scope for rapid public spending growth from fast growth in the wealth fund. It is tougher to fund public services and develop new projects. Continued weak productivity growth, relatively high labour costs, plus weakening labour-force participation are lessening economic capacity to support good outcomes in wellbeing.

Norway will need to substantially reduce transport-related greenhouse-gas emissions to achieve targets. Thanks to extensive hydropower, Norway has comparatively low baseline emissions, but substantial emission reduction is needed to hit targets. Around half of emissions are outside the European Trading Scheme and a large share of these relate to transport. Wide differences in carbon pricing mean policy is inefficient.

The economy is vulnerable to trade and property-market risks

Growth in real mainland GDP has recovered from the 2014 oil-price shock and remains robust. However, external risks are substantial.

Mainland GDP growth remains sufficiently strong to drive further declines in unemployment. Also, wage growth has picked up. Mainland output growth is projected to ease over the projection horizon.

Figure 1. GDP growth is robust

Source: OECD Economic Outlook database.

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Monetary and fiscal policy stances are appropriate given current economic conditions. Following four hikes, the first in September 2018, the policy rate is now on hold, reflecting slowing output growth prospects and external risks. Government budgets have been aiming for a neutral stance.

Table 1. Mainland GDP growth will be around 2% in 2020 and 2021

(Annual growth rates, unless specified)	2018	2019	2020	2021
Mainland GDP	2.2	2.5	2.0	1.7
Private consumption	1.9	1.8	1.9	1.9
Government consumption	1.4	2.2	1.9	1.8
Gross fixed capital formation	2.8	4.3	3.3	2.1
Exports of goods and services	-0.2	1.6	2.6	3.1
Imports of goods and services	1.9	5.45	1.	2.0
Unemployment rate (% of labour force)	3.8	3.4	3.2	3.2
Consumer price index	2.7	2.3	2.0	2.2

Source: OECD Economic Outlook 106 database.

External-demand risks remain elevated. The global slowdown in trade and investment, together with faltering business and consumer confidence in the euro area, is a risk to Norway’s predominantly European trade.

Figure 2. House prices remain elevated

Source: Calculations based on Real Estate Norway (Eiendom Norge) data.

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Property markets and related credit appear to be heading for a soft landing but risks remain. House-price growth has resumed at a subdued rate following some downward correction, suggesting demand for housing remains robust. Household debt continues to increase faster than disposable incomes, signalling a continued build-up of risk. Estimated selling prices of commercial real estate have been rising rapidly, which has previously foreshadowed wider economic difficulties.

The impact from any further housing market correction is most likely to come via consumption. Debt servicing remains high, implying a greater cutback in consumption in the event of an economic downturn. Thanks to mortgage-lending regulation, the quality of credit is sound and direct risks to banks via mortgage default appear well contained by their strong capitalisation.

The high share of wholesale bank funding is a concern. The scale of this funding, which is largely through covered bonds, is equivalent to just under 70% of GDP. Substantial cross holding of these bonds within the Norwegian financial sector increases inter-connectedness risks.

Fiscal space is set to increase more slowly in the coming years

Due to a likely slowdown in wealth-fund growth, fiscal non-oil deficits in the coming years will only be able to increase marginally under the fiscal rule. Fiscal pressures will also come from additional spending commitments. These commitments are estimated to cost at least 0.3 percentage points of GDP each year on average. Rising health care and pension costs from population ageing are a significant component. A proposal in early 2019 to fund some public spending through an off-budget channel has illustrated the strong temptation to circumvent the fiscal rule; such proposals should be avoided.

Figure 3. Non-oil deficits can no longer increase rapidly

Non-oil deficit under 3% rule for wealth fund spending

Source: Ministry of Finance, 2020 budget.

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Managing public finances within the fiscal rule should be achieved primarily through higher labour supply and increased value for money in public spending. There is scope for better public spending in many areas, as identified in the current, and past, Surveys, including through greater influence of cost-benefit analysis on investment decisions. Meanwhile, the tax burden is among the highest in the OECD.

Reforms to eliminate tax distortions and reduce burdens have been a central pillar of economic policy and good progress has been made. The headline rate of corporate-income tax has been reduced, value-added tax is now more uniform and efforts to tackle base erosion and profit shifting (BEPS) continue. However, tax concessions for owner-occupied property remain too generous and some revenue-raising policies have been reversed. For instance, the government reduced road tolls in response to popular protests.

Productivity growth is low and labour force participation has been slipping

The “Nordic” socio-economic model requires a high productivity business sector and high labour-force participation.

Sustaining high levels of wellbeing requires a high-productivity business sector, which is competitive in a high-wage, high-tax environment. Norway is generally well placed to harness the next generation of digital technology and research and development (R&D) activity is picking up pace. However, policy improvements are still needed, including in insolvency arrangements and sectoral support, notably the extensive support for agriculture.

Norway’s labour market achieves low unemployment, high incomes and good job quality. A narrow wage distribution and high labour-force participation of women are primary drivers of the low levels of income inequality. The system of coordinated annual wage negotiations generally delivers wage awards consistent with macroeconomic conditions.

However, labour-force participation has been declining and Norway is no longer among the top-ranking countries. This is weakening its good record on economic inclusiveness and raises concerns for future growth as the population ages. Employment is a central focus of this Survey’s in-depth examination of labour markets.

Figure 4. Labour force participation has been falling

Source: OECD Employment database, www.oecd.org/employment/database

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. High rates of sickness absence among workers and large numbers on disability benefits remain problems that are not yet fully addressed. A government-appointed commission has made promising proposals for reform. These head in the direction of OECD recommendations, in particular proposing to strengthen employee and employer incentives for a return to work, including on a part-time basis.

Old-age pension reform is improving retirement choices but issues remain. Recent reforms have made retirement incentives more balanced for public-sector employees. However, reform of special retirement schemes for those working in areas such as police and defence is overdue, pension arrangements for those on disability benefits need adjusting and there is scope for more life-expectancy adjustment in the mainstream pension system. Introduction of the “sliterordningen” (early retirement scheme) is a sign of some backtracking on earlier reform.

The labour-market integration of low-skilled immigrants requires further attention. Migrants with low education and skills are now more numerous, partly due to an increased share of refugees. This has deepened the challenges for labour-market integration policy, especially as demand for low-skill workers is limited in Norway.

Improving education and training is part of the solution to the productivity-growth slowdown and weakening labour-force participation.

Norway’s education system provides substantial support and encouragement for learning. Yet, PISA scores of secondary-school student skills are only around the OECD average and boys’ academic performance in school has been declining relative to girls. In post-secondary education, non-completion of vocational courses is high and many students in higher education do not graduate until their mid-to-late 20s.

 

MAIN FINDINGS	KEY RECOMMENDATIONS
Macroeconomic stability and managing property-market risks
External demand risks remain elevated, output-growth prospects have diminished. Vulnerabilities stemming from property markets remain a risk, despite some correction in the housing market.	Keep the policy rate on hold, while remaining vigilant to changing circumstances. Maintain close monitoring of financial market and housing risks, renew macroprudential mortgage regulations when they expire, consider removing time limitations. Reduce tax concessions on homeownership. Either gradually phase out mortgage-interest relief or introduce implicit rental income while paying attention to symmetries in the tax system.
Fair access to resource wealth across generations, value for money in public spending
Slower expected growth in the wealth fund implies a substantial narrowing of fiscal space for the foreseeable future.	Apply the fiscal rule conservatively over the longer term, keeping structural deficits below the 3% path in the near term. Strengthen value for money in public spending. Improve outcomes and lower costs through more extensive use of cost-benefit analysis and productivity enhancing measures in public services.
Diversification to non-oil activities, seizing opportunities from globalisation and digitalization
The rapid growth in research and development activity suggest stronger engagement at the frontiers of technology and know-how. However, policy improvements are still needed. Low productivity growth remains a concern for future living standards.	Strengthen business dynamics through better routes to recovery for businesses in difficulty, including lighter penalties for failed entrepreneurs. Continue to tackle weak points in business efficiency, including by paring back the extensive support for the agricultural sector.
Raising employment levels and skills
Sick leave absence is high and numbers on disability benefits remain elevated.	Strengthen incentives to contain sick-leave absences, including through lowering sick-leave compensation and by extending employers’ participation in funding. Intensify management efforts to address sick leave in sectors facing elevated levels of absence due to illness, in particular in the public sector. In disability benefits, strengthen treatment and rehabilitation requirements and apply eligibility rules in general more strictly. Make early interventions that encourage and facilitate return to work a strong theme of future reforms to sickness leave compensation and disability benefits. Tighten medical assessment for both sick leave and disability benefit systems.
Early retirement remains common.	Align special pension provisions for certain occupational groups such as nurses, national defence and the police with the mainstream pension system. Index age-dimensions of the pension system to life expectancy, such as the retirement-age range of 62 to 75 years. Diminish the financial attractiveness of early retirement via disability benefits by putting the compensation for life-expectancy adjustment in pensions on hold.
In education, PISA test results are only around the OECD average, many vocational upper-secondary students fail to complete courses, apprenticeship places are in short supply and students taking degree-level courses graduate comparatively late.	Press ahead with primary- and secondary-school curriculum reforms. Reduce apprentice remuneration to make it more attractive for employers to offer additional places. Link part of the employer subsidy to course completion by apprentices. Strengthen higher-education students’ incentives for timely course completion. Ensure that higher education institutions provide comprehensive study guidance and support services.
Some immigrant groups struggle to get and keep jobs.	Introduce subsidised apprenticeship-like programmes as part of efforts to raise immigrants’ skills and work experience.
Moving towards green growth
Under current policies, programmed measures for reducing domestic non-ETS emissions will need to be combined with non-ETS reductions purchased from EU-countries for goals to be met.	Pursue cost efficiency across sectors and borders in fulfilling Norway's Paris 2030-goal within the EU climate framework. Intensify greenhouse-gas reduction measures in particular in transport and agriculture. Review and reform road pricing and vehicle taxation, giving weight to social, fiscal and environmental considerations.